Sheila is standing in the ticket line at a movie theater when four
friends walk up and ask if they can cut in line in front of her.Sheila quickly determines that the opportunity cost to her
of letting them do so is one minute -- that's the time she
would gain if she didn't let them cut in line.

But
what
about the other people in line?If Sheila lets her friends get in line ahead of her, then
not only Sheila but everyone in line behind her will have to wait
an extra minute to get an admission ticket.If there are ten people in line behind Sheila, then the
cost to them of letting the friends cut in line is ten times one
minute or ten minutes.

When something you do
harms another -- and that person isn't compensated for that
harm -- then you are creating an external cost. If you talk loudly in the library, or play your
stereo at

midnight, or smoke cigarettes, or neglect to bathe, or drive
while drinking, or practice your violin, you are probably imposing
external costs on others.

The social cost of a good or activity includes both the opportunity cost
to you plus any external costs imposed upon others.For example, the social cost of Sheila letting her friends
cut in line is:

Social Cost of Letting Four Friends Cut in Line

Opportunity
cost to Sheila of being delayed:1 minute
External cost to people behind Sheila:10
minutes
_________________________________________

Social
cost:11 minutes

Should
you take external costs into consideration when deciding whether
to do something? Most
people do.If they
didn't, ours would be a very unpleasant society to live in.We call people who fail to consider the external costs of
their actions rude.

We
create external benefits
when others benefit from something we do but don't compensate us
for their gain.Mrs.
Nappi, for example, keeps her front lawn manicured and plants
hundreds of flowers in her planting beds.People who pass by get benefits from her landscaping,
but don't compensate her in any way.This means that her beautiful front yard produces external
benefits.

Almost
everything we do causes some sort of external benefits or costs,
collectively called externalities.When we plant flowers, pick up litter, or comb our hair, we
create external benefits for others.When we smoke, drive, or sneeze, we often impose external
costs.Some
activities, like wearing perfume, may cause external benefits for
some and external costs for others.

A rule for making decisions

Here's a decision-making rule that incorporates
externalities:

Do
something if its social benefit outweighs its social
opportunity cost.

The
social opportunity cost of doing something includes both the private
opportunity cost to the decision-maker plus any external costs.The social benefit
is equal to the private benefit to the decision-maker, plus any
external benefits.

People who take
external costs and benefits into consideration when making
decisions are said to internalize externalities. People
who internalize externalities weigh external costs and benefits
just the same as their own private costs and
benefits.When
making decisions, they try to make society better off,
not just themselves.

But
some people aren't very considerate.The failure of some individuals -- and firms -- to consider the effects of their actions on others is the root of
countless social problems like rudeness, crime, and excessive
pollution.One of the
most challenging problems in our society is to find ways to get
more people and firms to internalize their externalities.

How can we get people to internalize externalities?

Suppose that Alicia is chewing gum loudly while
taking a state board exam. This annoys Jim, who can't
concentrate. How can we get Alicia to internalize the
external costs of chewing gum?

1.Etiquette

Here's
what The New Emily Post's Etiquette by Elizabeth Post has
to say about chewing gum:

... Chewing gum, in itself, if it is done quietly and
unobtrusively, is not unattractive.But when one does it with grimaces, open mouth, smacks,
crackles, and pops, and worst of all with bubbles, it is in the
worst of taste.

The
book also urges us not to stare, belch, or talk with our mouths
full.On the other
hand, we should hold doors open for others, write thank-you notes,
and give our bus seats to pregnant women.Why?To reduce
the external costs we impose upon others, and to increase the
external benefits.

Ms.
Post summarizes good etiquette this way:"The cardinal principle of etiquette is
thoughtfulness.This
implies concern for the effect of your actions on those around
you."People
with good manners balance the rights of others against their own.In other words, they internalize externalities.

It's
not clear what motivates people to obey rules of etiquette.There's no Etiquette Police to enforce the rules, and no
Court of Etiquette to sentence offenders.Yet many people choose to be guided by the rules of
etiquette anyway.They
know that without it, our society would be a very uncivilized
place to live.

2.Negotiation.

Alicia
violated a rule of etiquette when she chewed gum loudly.But maybe it was because she didn't know she was annoying
anyone.It's hard to
internalize externalities if you don't know they exist.It might be helpful, then, for Jim to talk to Alicia.He could take her aside and ask her to please stop, or
perhaps to chew more quietly.

People often remind others about external costs with signs,
like "Please don't smoke," "Hang up and
drive!", and "If you can read this, you're too
close."

3.Move away from
the externality.

Another
solution might be for Jim to change seats and move away from
Alicia.Perhaps he
could sit in an empty seat on the other side of the classroom when
he returns from lunch.Then
Alicia could chew gum while Jim took his test in peace.

Some
people, though, would object to this solution out of principle.They would argue that Alicia doesn't have the right to
impose external costs on Jim.Since it's her fault, she should be the one to move, not
Jim.

But
what if it wasn't Alicia's gum chewing that annoyed Jim, but
rather the noise she makes when she erases her answers?Or what if Alicia went to a remote bench to chew gum during
lunch and Jim walked over and sat down next to her.Do you still think that Alicia should be the one to move?

It
takes at least two people to create an external cost -- the
person causing the annoyance and the person being annoyed.And it's not always clear who's to blame.Many people would blame Jim if he were annoyed by the sound
of Alicia's erasures.

Regardless
of who's to blame, sometimes the "victim" is in the best
position to prevent the external cost from occurring.Suppose your sister annoys you when she
practices her clarinet.One
solution would be for her to soundproof her room at a cost of
$850, but a cheaper
one would be for you to buy a pair of $2 ear plugs.

4.Regulation

Suppose
that Alicia refuses to stop chewing gum, and that Jim is not
allowed to move from his assigned seat.Jim might then ask the proctor to ban gum chewing
during the exam.Doing
this would completely eliminate the external costs from gum
chewing in the classroom.

A
problem, though, with inflexible rules like "No gum
chewing" is that they don't allow for better solutions to be
worked out, like having Alicia chew quietly or having Jim change
seats.

Unfortunately,
regulations sometimes become necessary when etiquette and
negotiations break down.For example, many communities and organizations now have
rules which ban smoking.This
prevents smokers from annoying nonsmokers, but it also prevents
people from working out better solutions among themselves.

Even if regulations did work well, we couldn't rely upon them to
deal with all external costs.To see why, try this experiment when you wake up tomorrow
morning:See how long
you can go without imposing external costs on someone.You probably won't get very far.Some people wouldn't make it past the first buzz of the
alarm clock.

Now
consider what it would be like if we tried to control all external
costs with regulations.Here's
what some of the regulations might look like:

Rule
13,327.Alarm
clocks.The clock's
sound-generating mechanism must be set to 60 decibels or less if
others are sleeping within a 25 foot radius of the clock and
choose not to be awakened by it.

Rule
5,219.Birthday
candles.The person
celebrating his or her birthday (hereinafter known as the
Birthday Person) shall spray as little moisture on the cake as
possible when blowing out the candles.The Birthday Person shall refrain from blowing out the
candles if he or she has a cold, flu, or other contagious
disease.

Can
you imagine memorizing volumes full of rules like these?And no matter how well the rules were designed, there would
still be countless pleas for special exceptions. For example, the
required 60 decibel alarm clock isn't loud enough to wake Mr.
Jackson, who's hard of hearing.And Sally has a contagious disease -- athlete's foot.Does that means she can't blow out her birthday candles?

But
all of these rules are quite unnecessary.There's a single rule that can cover everything from alarm
clocks to zoo trams, yet bend easily to meet the special needs of
the people involved.And
it's small enough to fit into a fortune cookie.The rule is this:Internalize
externalities.